What is GST??
GST stands for goods and services tax. Goods and Services Tax would be a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments.
Earlier taxes were levied separately on goods and services. Goods are tangible products subject to tax such as VAT and CST on sale and purchase. Services were taxed by service tax.
Seller or service provider could claim the input tax credit which he must have paid while purchasing the goods or procuring the service.
Why is GST required??
Earlier India’s tax regime relied on indirect tax such as customs and excise. Revenue from indirect taxes was the major source of tax revenue until reforms such as CENVAT , MODVAT were introduced during 90’s. There were many taxes such as custom which was levied on exports and excise on manufacture.
Q. Why emphasis on indirect taxes?
1. India’s population was predominantly poor and thus widening the base of direct tax had its own limitations. Poor could not pay income tax and it would have been wrong to levy income tax on them.
2. Agricultural income has always been exempted from income tax. Since 55% of our population is dependent on agriculture, we are letting go the income earned by more than half of the population of the country.
3. There were various administrative difficulties in collecting taxes. Therefore if direct taxes were not collected where would the government fulfill its revenue needs from. It would be from indirect taxes.
The constitution empowers the central government to levy excise duty on manufacturing and service tax on the provision of services. It also empowers the state government to levy sales or value added tax on sale of goods within the state. This exclusive division of fiscal power has lead to multiplicity of indirect taxes in the country. Multiplicity because there are so many indirect taxes.
In case of interstate sales CST is levied by the central government. It is collected and retained by the originating state. This further adds to the multiplicity of indirect taxes. Many states also levy entry tax on entry of goods in local areas.
Now since there are so many taxes we have to specifically see that more the number of taxes larger will be the complexities. This multiplicity of taxes at state and central level has resulted in an extremely complex indirect tax structure in the country that is ridden with hidden costs from trade and industry. Hidden cost because lot of management and manpower is necessary to manage everything.
Keeping in mind the above complex tax structure in the country it was thought to rationalize and simplify the tax structure. Thus the GST was introduced.
Benefits of GST:
GST will make a nation wide common market and will do away with the multiplicity of central and state taxes. It will improve the tax governance because only one tax will be there so the administration will be efficient as compared to the current scenario. More the number of taxes more departments , more manpower requirement and more of tax evasion.
The Indian GST will be a leap forward in creating a much clearer dual tax structure thereby minimizing the disadvantages of completely independent and centralized systems.
A common base and common rates (across goods and services) will facilitate administration and improve compliance while rendering manageable collection of taxes on sales.
Proposed model of GST:
GST will have two components :
Levied by the center ( hereinafter referred as Central GST )
Levied by the state ( hereinafter referred as state GST )
The central and state GST will be applicable on all goods and services made for a consideration i.e. price , except for those which are exempted.
Items not covered under the GST purview :
•Entertainment and amusement tax levied and collected by panchayat / municipality/ district council
•Tax on alcohol and liquor consumption
•Stamp duty and custom duty
•Tax on consumption and sale of electricity
The central and state GST will be paid to separate accounts i.e. central GST to central account and state GST to state account. This would avoid any kind of clashes in future.
Central GST will get credit against central taxes paid and state government against the state taxes paid.
A taxpayer or an exporter will have to maintain separate accounts for utilization or refund of credit. Further the rules for taking and utilization of credit for the central and state GST would be aligned.
Amendments from the last draft :
1.The provision of additional tax up to 1% on the supply of goods levied by center on inter-state trade or commerce has been deleted.
2.If GST is brought into application it will subsume all other taxes. VAT i.e. value added tax is a tax levied by state government on intra state sale of goods. Now when this is removed it will cause loss of revenue to state. So the parliament will provide with compensation for the loss which will not be for a period of more than 5 years. However it will be based on the recommendations of GST council.
3.This implies that:
•Parliament must provide compensation
•Compensation cannot be allowed for a period of more than 5 years but allows parliament to decide a shorter time period.
The GST council shall establish a mechanism to adjudicate any disputes arising between :
•Centre and one or more state
•Centre and state and one or more state
•State and state
The amendments need to be passed in lok sabha then it will have to considered and approved by majority of state assemblies before it can be sent to president for assent.
Role of GST council:
The task of the council will be to optimize tax collection for goods and services by the centre and state.
The GST council will consist of :
•Union Finance minister as the chairman
•Union minister of state in charge of revenue or finance
•Minister in charge of taxation or finance or any other as nominated by the state government.
The council will decide which tax levied by centre , state and local bodies will go into GST; which goods and services will be subjected to GST and the basis and rate at which the GST will be applied.
In my opinion GST should surely be brought into operation because not only will it do away with the multiple taxes in India but will also mitigate cascading or double taxation facilitating a common national market. It will avoid tax evasion and help in better administration of the tax system.